4. Economic impacts of transgenic crops

Like any technological innovation in agriculture, transgenic crops will have economic impacts on farmers, consumers and society as a whole. This chapter analyses the emerging economic evidence regarding the farm-level and economy-wide impacts of the most widely adopted transgenic crop in developing countries: insect-resistant cotton. It surveys the existing peer-reviewed economic studies of the level and distribution of economic benefits derived from the adoption of insect-resistant cotton in the United States and the five developing countries where it has been approved for commercial production (Argentina, China, India, Mexico and South Africa). An additional study estimates what the economic impacts of transgenic cotton might be for farmers in five West African countries where it has not yet been approved (see Box 16). In addition to the cotton case studies, the chapter also includes a short analysis of the economy-wide impacts of herbicide-tolerant soybeans in Argentina and the United States, the two largest growers of this crop. An ex-ante analysis of the potential consumer benefits of “Golden Rice” is presented in Box 13.

BOX 13 Projecting the economic impacts of “Golden Rice” in the Philippines

Golden Rice has been genetically engineered to produce beta-carotene, the precursor to vitamin A. Golden Rice was developed by researchers at German and Swiss universities (Ye et al., 2000). The owners of the patents who were involved in the development of Golden Rice have donated them for humanitarian purposes, which means that farmers in developing countries (with sales of less than $10 000) are permitted to grow and reproduce Golden Rice without paying technology fees.

Vitamin A deficiency affects more than 200 million people worldwide and is responsible for an estimated 2.8 million cases of blindness in children under five years of age (FAO, 2000a). Golden Rice has been proposed for people who depend on rice for the bulk of their diets. Critics claim that Golden Rice is an expensive, high-tech solution to a problem that should be addressed through dietary diversification and dietary supplements. Supporters agree that dietary diversification would be ideal, but argue that this goal is not attainable for the millions of people who cannot afford more than a subsistence diet. Is Golden Rice an economically efficient mechanism for delivering vitamin A to the poor?

Zimmermann and Qaim (2002) conducted the first study of the potential economic impacts of Golden Rice in the Philippines. Golden Rice is currently being adapted for local growing conditions at the Philippine-based International Rice Research Institute (IRRI). The authors estimate that the original financial effort required to develop Golden Rice was about $3 million and that a further $10 million will be required to complete adaptive research in the Philippines and to conduct the necessary safety trials. On the other hand, they estimate that Golden Rice could prevent almost 9 000 new cases of blindness and 950 deaths per year in the Philippines alone. Using a World Bank index of economic losses due to ill health and premature death, the authors calculate the potential economic benefits of Golden Rice in the Philippines at about $137 million. This represents a 10-to-1 return on the total development costs for Golden Rice and a 13-to-1 return on the marginal costs of adapting and testing the product specifically for the Philippines.

The authors acknowledge that these estimates depend on a range of parameters that are not known with certainty, such as the level of beta-carotene produced in Golden Rice, the amount of beta-carotene people will be able to absorb from it, the efficacy of the additional vitamin A in preventing disease and the number of people who would be reached by Golden Rice. Even assuming pessimistic figures for each of these factors, they estimate that Golden Rice would still yield benefits equal to more than double the costs of adapting and testing the product for the Philippine market. The authors futher report that the costs of other treatments for vitamin A deficiency in the Philippines are about $25 million per year (for food supplements and vitamin fortification) as compared with no recurrent costs for Golden Rice. They conclude that Golden Rice is a sustainable and low-cost alternative to other treatments.

Sources of economic impacts

The overall economic impacts of transgenic crops will depend on a wide range of factors including, among others, the impact of the technology on agronomic practices and yields, consumers' willingness to buy foods and other products derived from transgenic crops, and regulatory requirements and associated costs. In the longer term, other factors such as industry concentration in the production and marketing of transgenic crop technology may also influence the level and distribution of economic benefits.

Farmers who adopt the new technology, especially those who adopt early, may reap benefits in terms of lower production costs and/or higher output. Other farmers could be placed at a competitive disadvantage depending on how consumer preferences and regulatory regimes evolve (see Chapter 6). If consumers are generally accepting transgenic crops and regulatory requirements are not too onerous, adopting farmers would gain and non-adopting farmers would lose. If consumer opposition grows, however, non-adopting farmers could turn that into a competitive advantage and command a price premium for non-GM products.

Consumers generally benefit from technological innovation in agriculture as a result of lower prices and/or higher quality of the products they buy. The case is more complicated with transgenic crops for at least two reasons. First, regulatory requirements such as mandatory labelling and market segregation could add to the costs of producing and marketing transgenic crops and prevent consumer prices from falling. On the other hand, some consumers are strongly opposed to the technology. These consumers could experience a welfare loss if they were forced either to consume products derived from transgenics or to buy higher priced organic products in order to avoid them.

The net economic impact of transgenic crops on society is thus a highly complex and dynamic concept that is not easily measured. In the first instance, transgenic crops will only be widely adopted if they provide economic benefits for farmers. For developing countries, in particular, a number of economic and institutional factors affect the farm-level profitability of transgenic crops in addition to their purely agronomic characteristics. Economic research is beginning to show that transgenic crops can generate farm-level benefits where they address serious production problems and where farmers have access to the new technologies. Thus far, however, these conditions are only being met in a handful of countries. These countries have been able to make use of the private-sector innovations developed for temperate crops in the North. Furthermore, these countries all have relatively well-developed national agricultural research systems, biosafety regulatory procedures, intellectual property rights regimes and local input markets. Countries lacking these prerequisites may be excluded from the gene revolution.

The existing literature on the impacts of transgenic crops in developing countries is quite limited, primarily because these crops have been grown for only a few years and in a few countries. Data for more than two or three years are rarely available, and most studies cover a relatively small number of farmers. Such small sample sizes make it particularly difficult to isolate the impact of a transgenic crop from the many other variables that influence crop performance, such as weather, seed and pesticide quality, pest loads and farmer skill. Furthermore, farmers may require several years of experience with a new technology such as insect-resistant cotton before they learn to use it efficiently. An additional problem with drawing strong conclusions from this early evidence is that early adopters of any agricultural technology tend to benefit more than later adopters. This occurs because early adopters achieve a cost advantage over other farmers, earning a premium for their innovation. As more farmers adopt the technology, the cost reduction eventually translates into a price decline for the product that means, while consumers continue to benefit, the gains to farmers decline. A third danger with transgenic crops is that they are, for the most part, controlled by a few large companies. Although these companies do not appear to be extracting monopoly profits from the sales of their products, in the absence of competition and effective regulation, there is no guarantee that they will not do so in the future.

Transgenic cotton is now being grown in a sufficiently large number of countries, under different institutional and market conditions and by different types of farmer, to allow some tentative conclusions to be drawn about the potential benefits and challenges arising from the use of transgenic crops in developing countries. Although it is risky to extrapolate results from one country or one crop to another, the early evidence for transgenic cotton suggests that resource-poor smallholders in developing countries can gain significant benefits from the adoption of transgenic crops in terms of higher and more stable effective yields, lower pesticide costs and reduced health risks from chemical pesticide exposure. Longer-term studies that carefully evaluate pest loads, crop performance, farmer behaviour and economic returns are necessary to confirm these preliminary findings. The case studies presented below indicate that the most important factors in ensuring that farmers have access to transgenic crops on favourable economic terms and under appropriate regulatory oversight include:

sufficient national research capacity to evaluate and adapt innovations;

active public and/or private input delivery systems;

reliable, transparent biosafety procedures; and

balanced intellectual property rights policies.

Global adoption of insect-resistant cotton

Transgenic cotton containing a gene from the bacterium Bacillus thuringiensis (Bt) that is resistant to certain insect pests (Box 14) was first grown in Australia, Mexico and the United States in 1996 and has subsequently been introduced commercially in six other countries: Argentina, China, Colombia, India, Indonesia and South Africa (Table 5). Global area planted in Bt- and stacked Bt- and herbicide-tolerant (Bt/HT) cotton varieties increased from less than 1 million ha in 1996 to 4.6 million ha in 2002 (an additional 2.2 million ha of herbicide-tolerant cotton were grown in 2002). Bt and stacked Bt/HT cotton varieties accounted for about 15 percent of global cotton area in 2002 compared with only 2 percent in 1996.

The adoption of Bt cotton has varied greatly across growing regions within China, Mexico, the United States and elsewhere depending on the particular combination of pest control problems. Bt cotton varieties have been rapidly accepted by farmers in areas where bollworms are the primary pest problem, particularly when resistance to chemical pesticides is high. When other pest populations are high, farmers use a mixture of broad-spectrum chemicals that achieve coincidental control of bollworms, reducing the value of Bt control.

BOX 14 What is Bt cotton and why is it grown?

Genes from the common soil bacterium Bacillus thuringiensis (Bt) have been inserted into cotton plants, causing them to produce a protein that is toxic to certain insects. Bt cotton is highly effective in controlling caterpillar pests such as pink bollworm (Pectinophora gossypiella) and cotton bollworm (Helicoverpa zea), and is partially effective in controlling tobacco budworm (Heliothis virescens) and fall armyworm (Spodopterafrugiperda). These pests constitute a major pest control problem in many cotton-growing areas, but other cotton pests such at boll weevil are not susceptible to Bt and continue to require the use of chemical pesticides (James, 2002b). As a result, the effect of the introduction of Bt cotton on pesticide usage varies from region to region, depending on the local pest populations.

The first Bt cotton varieties were introduced commercially through a licensing agreement between the gene discoverer, Monsanto, and the leading American cotton germplasm firm, Delta and Pine Land Company (D&PL). These varieties contain the Cry1Ac gene and are commercialized under the trade name Bollgard®. Varieties with transgenes for insect resistance and herbicide tolerance (Bt/HT) stacked together were introduced in the United States in 1997. Monsanto recently received regulatory approval in some markets for a new product that incorporates two Bt genes, Cry1Ac and Cry2Ab2. This product, known as Bollgard II®, was commercialized in 2003. The incorporation of two Bt genes is expected to improve the effectiveness of the product and delay the development of resistant pests.

More than 35 different Bt and Bt/HT cotton varieties are on the market in the United States (data from the United States Department of Agriculture [USDA]). These varieties and most Bt varieties worldwide contain genes licensed from Monsanto. An exception is in China, where an independent source of Bt protection is available. The Chinese Academy of Agricultural Sciences (CAAS) developed a modified Bt gene that is a fusion of the Cry1Ac and Cry1Ab genes. In addition, CAAS isolated a gene from cowpea, CpTi, that provides insect resistance through a different mechanism. CAAS has stacked the CpTi gene with the Bt fusion gene and incorporated them in more than 22 locally adapted varieties for distribution in each of the Chinese provinces. The stacked CAAS varieties are expected to delay the development of resistant pests. The Monsanto Cry1Ac gene is also available in China through at least five varieties developed by D&PL (Pray et al., 2002). In Argentina, Mexico, South Africa and elsewhere, the Bt cotton varieties all contain the Monsanto Cry1Ac gene, often in varieties originally developed for the United States market.

Conventional cotton production relies heavily on chemical pesticides to control caterpillars and other insect pests. It is estimated that cotton production consumes about 25 percent of the agricultural pesticides used worldwide, including some of the most toxic chemicals available. Chlorinated hydrocarbons (such as DDT) were widely used in cotton production until these were banned in the 1970s and 1980s for health and environmental reasons. Cotton farmers then replaced DDT with organophosphates, many of which are also highly toxic. Pests in many regions quickly developed resistance to organophosphates, and pyrethroids, which are less toxic than organophosphates, came into widespread use in the 1980s and 1990s. Resistance to pyrethroids soon developed and multiple chemical resistance has become a severe problem in many growing regions. In areas where bollworms are the major pest and chemical resistance is a problem, Bt cotton varieties have contributed to a dramatic reduction in pesticide use.

An important advantage of Bt over chemical control of pests, from a production point of view, is that Bt control is always present in the plant. Because farmers apply chemical controls only after noticing the presence of pests on the cotton plants, some damage will have already occurred. The effectiveness of chemical insecticide applications, unlike transgenic Bt, also depends on the weather, because rain can wash the chemical away. Bt cotton offers farmers increased certainty of control because it is effective against insects that have developed resistance to available chemical pesticides. As a result, Bt varieties have superior yield performance over a wide range of growing conditions (Fernandez-Cornejo and McBride, 2000). The estimated difference in yield performance between Bt and conventional cotton varies considerably across time and space because insect infestations vary widely. The relative performance of Bt cotton is highest under conditions where pest pressure is heaviest and chemical pesticide resistance is common.

The major concern associated with the use of Bt cotton is the possibility that pests may develop resistance to Bt as they have with chemical pesticides. This would be a serious problem for organic cotton producers who rely on Bt sprays for pest control. Widespread resistance to Bt would reduce the effectiveness of this option. Pest resistance management is an important part of the regulatory approval process for transgenic cotton. This issue is discussed in more detail in Chapter 5.

Economic impacts of transgenic cotton

The main farm-level economic impacts of the transgenic crops currently being grown are the result of changes in input use and pest damage. Where the new seeds reduce the need for chemical sprays, as can be the case with pesticide-resistant or HT crops, farmers may spend less money on chemicals and less time and effort applying them. Where the new seeds provide more effective protection from weed and pest damage, crops may have higher effective yields.3 These cost savings and output gains can translate into higher net returns at the farm level. Farm-level economic gains depend on the costs and returns of the new technology compared with those of alternative practices.

The economy-wide and distributional impacts of the introduction of transgenic varieties must also take into account the fact that farmers may expand production as the new technology reduces its costs. This supply response can push prices down, benefiting consumers who may then demand more of the product. As farmers' purchases of seeds and other inputs change, prices for those items may also change, particularly if the input supplier holds a monopoly position in the market. These economy-wide forces will affect the overall level of economic benefits and the distribution of benefits among farmers, consumers and industry.

TABLE 5 Bt and Bt/HT cotton area, 2001

Country

(000 ha)Area

United States

2 400

China

1 500

Australia

165

Mexico

28

Argentina

9

Indonesia

4

South Africa

30

Total

4 3001

1 Country figures do not sum to the total owing to rounding and estimates.Source: James, 2002b.

Economic impacts in the United States

In the first year of commercial availability in the United States, Bt cotton was planted on about 850 000 ha or 15 percent of the country's total cotton area. By 2001, 42 percent of the cotton area was planted to Bt and stacked Bt/HT cotton varieties (USDA-AMS, various years). The United States remains the largest producer of Bt and Bt/HT cotton, but its share of global transgenic cotton area fell from about 95 percent in 1996 to about 55 percent in 2001 as adoption in other countries increased.

United States farmers adopted Bt cotton very quickly, especially in the southern states where pest pressure is high and chemical pesticide resistance is most pronounced (Table 6). Bt cotton adoption has had a large impact on pesticide use in the United States. The average number of pesticide applications used against bollworms has fallen from 4.6 in 1992-95 to 0.8 applications in 1999-2001 (Figure 8). Carpenter and Gianessi (2001) and Gianessi et al. (2002) estimate that the average annual use of pesticides on cotton in the United States has been reduced by approximately 1 000 tonnes of active ingredient.

Falck-Zepeda, Traxler and Nelson (1999, 2000a, 2000b) calculated the annual impacts of Bt cotton adoption in the United States on United States cotton farmers, consumers, germplasm suppliers and foreign farmers for the 1996-98 period using a standard economic surplus model (Alston, Norton and Pardey, 1995). The estimated amount and distribution of benefits from the introduction of Bt cotton fluctuates from year to year; thus the average figures for the period 1996-98 are also shown in Figure 9. United States cotton farmers gained a total of about US$105 million per year in higher net incomes as a result of Bt adoption, which lowered their production costs and raised effective yields. The industry - primarily Monsanto and D&PL - earned about US$80 million from sales of Bt technology. Increased cotton output reduced consumer prices, producing a gain of about $45 million per year for consumers in the United States and elsewhere. Farmers in other countries lost about $15 million because of lower output prices for cotton. Total net annual benefits averaged approximately $215 million. The average benefit shares were 46 percent to United States farmers, 35 percent to industry and 19 percent to cotton consumers. The loss to foreign farmers was less than 1 percent of the total net benefit generated by the adoption of Bt cotton in the United States.

TABLE 6 Adoption of Bt cotton by farmers in the United States by state, 1998-2001

(Percentage)

1998

1999

2000

2001

Alabama

61

76

65

63

Arizona

57

57

56

60

Arkansas

14

21

60

60

California

5

9

6

6

Florida

80

73

75

72

Georgia

47

56

47

43

Louisiana

71

67

81

84

Mississippi

60

66

75

80

Missouri

0

2

5

22

New Mexico

38

32

39

32

North Carolina

4

45

41

52

Oklahoma

2

51

54

58

South Carolina

17

85

70

79

Tennessee

7

60

76

85

Texas

7

13

10

13

Virginia

1

17

41

30

Source: USDA-AMS, various years.

Economic impacts of transgenic cotton in developing countries

Field-level studies of the performance of Bt cotton have been completed in five developing countries over periods of one to three years: Argentina (Qaim and de Janvry, 2003), China (Pray et al., 2002), India (Qaim and Zilberman, 2003), Mexico (Traxler et al., 2003) and South Africa (Bennett, Morse and Ismael, 2003). Results from these studies are summarized in Table 7 and discussed below. Although Bt cotton varieties had higher average yields, lower pesticide use and higher net returns than their conventional counterparts in all of the developing countries where studies have been undertaken, a high degree of season-to-season and field-to-field variance is associated with the performance of both Bt and conventional cotton in these countries. Therefore, it is not possible to draw strong conclusions on the basis of two or three years of data for a few hundred farmers. Although the data so far and the continuing rapid pace of adoption suggest that farmers are benefiting from Bt cotton, it is too early to assess conclusively the level and stability of yields of Bt varieties compared with conventional varieties because these depend, among other factors, on pest infestations and agronomic practices, which vary widely.

The distributional impacts of Bt cotton have been studied for Argentina (Qaim and de Janvry, 2003), China (Pray and Huang, 2003), Mexico (Traxler et al., 2003) and South Africa (Kirsten and Gouse, 2003). The available evidence indicates that transgenic cotton varieties are scale neutral with regard to both speed of adoption and per hectare benefits. In other words, small farmers are equally or more likely to benefit from Bt cotton as are larger farmers. This is not surprising given the manner in which Bt cotton varieties simplify the farmers' management task. Qaim and Zilberman (2003) argue that the relative performance of Bt cotton is likely to be greatest when used by small farmers in developing countries where pest pressure is high and access to effective chemical pest control is low, because of the large pest losses typically suffered by these farmers. This notion is supported by the international data available to date, which show the yield advantage to be largest in Argentina, China and India.

TABLE 7 Performance differences between Bt and conventional cotton

Argentina

China

India

Mexico

South Africa

LINT YIELD

(kg/ha)

531

523

699

165

237

(Percentage)

33

19

80

11

65

CHEMICAL SPRAYS (no.)

-2.4

...

-3.0

-2.2

…

GROSS REVENUE

($/ha)

121

262

…

248

59

(Percentage)

34

23

…

9

65

PEST CONTROL

($/ha)

-18

-230

-30

-106

-26

(Percentage)

-47

-67

…

-77

-58

SEED COSTS

($/ha)

87

32

…

58

14

(Percentage)

530

95

…

165

89

TOTAL COSTS

($/ha)

99

-208

…

-47

2

(Percentage)

35

-16

…

-27

3

PROFIT

($/ha)

23

470

…

295

65

(Percentage)

31

340

…

12

299

Sources: Argentina: Qaim and de Janvry, 2003. Data are based on a survey of 299 farmers in two major growing provinces, averaged over two growing seasons, 1999/2000 and 2000/01.China: Pray et al., 2002. Data are based on farm surveys in all cotton-growing provinces where Bt varieties were available, averaged over three growing seasons, 1999-2001. The number of Bt and non-Bt plots surveyed were 337 and 45, respectively, in 1999, 494 and 122 in 2000, and 542 and 176 in 2001.India: Qaim and Zilberman, 2003. Data are based on field trials in seven Indian states in one growing season, 2001. The trials comprised 157 plots each of Bt cotton and a non-Bt conventional counterpart.Mexico: Traxler et al., 2003. Data are based on farm surveys in the Comarca Lagunera region, averaged over two growing seasons, 1997 and 1998.South Africa: Bennett, Morse and Ismael, 2003. Data are based on farm records and surveys in the Makhathini Flats, averaged over three growing seasons, 1998/99-2000/01. Records were examined for 1 283 farms (89 percent of all farmers in the area) in 1998/99, 441 in 1999/2000 and 499 in 2000/01.

Argentina

Qaim and de Janvry (2003) studied the case of Bt cotton in Argentina over two growing seasons, 1999/2000 and 2000/01. Bt cotton was first released in Argentina in 1998 by CDM Mandiyú SRL, a private joint venture between Monsanto, the Delta and Pine Land Company (D&PL) and the Argentine company Ciagro. The Bt varieties commercialized in Argentina were originally developed for the United States market. Bt cotton technology is patented in Argentina and farmers are required to pay technology fees. Under Argentine law, farmers are allowed to save and reproduce seed for one season before they are required to buy fresh certified material. However, Mandiyú requires farmers to sign special purchase contracts that prohibit the use of farm-saved seeds for Bt cotton. Unlike in other countries (or in the case of HT soybean in Argentina), the adoption of Bt cotton in Argentina has been slow and by 2001 had reached only about 5 percent of the total cotton area.

The yields for Bt cotton in Argentina averaged 531 kg/ha (or 33 percent) higher than for conventional varieties. Qaim and de Janvry (2003) note that the conventional varieties grown in Argentina are actually better adapted for local conditions and have higher agronomic potential yields than the Bt varieties, so the yield differential attributable to the reduction in pest damage to the Bt varieties would be even more than 33 percent. As there was little difference in market prices for Bt and non-Bt cotton, higher yields for the Bt varieties led to an average 34 percent increase in gross revenues. The number of pesticide applications was lower and pesticide costs were reduced almost by half. Seed costs, however, were more than six times higher for the Bt varieties than for conventional varieties and, as a result, total variable costs were 35 percent higher. Net revenues were higher for Bt than for non-Bt varieties, but by a fairly small absolute value and by a significantly smaller margin than in other countries.

Qaim and de Janvry (2003) conclude that high seed costs are the primary reason for the relatively low farm-level profit margins for Bt cotton in Argentina, which in turn explains the low rate of Bt cotton adoption compared with the rapid adoption of HT soybeans in that country (Box 15). They use a contingent valuation method to estimate that the price Argentine farmers would be willing to pay for Bt seeds is less than half of the actual price. At this lower price, farmers' net returns would significantly increase, but company revenues would also rise because farmers would buy more seed. This finding raises an important question regarding why Mandiyú would charge prices higher than their profit-maximizing level. The authors speculate that the company may be under pressure to maintain price levels for Bt cotton technology at levels comparable with those in the United States. It also raises concerns regarding the long-term potential for private monopolies to extract excess profits from farmers in the absence of competition or appropriate regulatory constraints on monopoly power.

RR soybeans were commercially released in Argentina and the United States in 1996. The sale and use of RR technology is protected in the United States through patents and a sales contract with farmers, but neither form of intellectual property protection is used in Argentina. Thus, in Argentina, RR soybeans are widely available from sources other than Monsanto and Argentine farmers are legally allowed to use farm-saved seeds. As a result, Argentine farmers pay a relatively small price premium for RR of about 30 percent, whereas farmers in the United States on average pay 43 percent more (data from [United States] General Accounting Office, 2000). Adoption proceeded rapidly in both countries. By 2002, an estimated 99 percent of the Argentine soybean area and 75 percent of the United States area were cultivated with RR seeds (James, 2002a).

Yields of RR soybeans are not significantly different from yields of conventional soybeans in either Argentina or the United States, but reduced herbicide and tillage costs generate farm-level benefits. Many farmers switched to low-till or even no-till cultivation practices after the adoption of RR soybeans, reducing machinery and labour costs and improving soil conservation. Harvesting costs are also lower because of the lower incidence of green weeds (Qaim and Traxler, 2004).

In Argentina, the total variable cost of production is about 8 percent ($21/ha) lower for RR soybeans than for a conventional crop. Results for the United States are less clear. Moschini, Lapan and Sobolevsky (2000) estimated a cost advantage of $20/ha for 2000 for the United States as a whole, and Duffy (2001) found negligible cost savings in Iowa in 1998 and 2000. Taking an average over all sources, it appears that cost savings in the United States are similar to those in Argentina.

Qaim and Traxler (2004) estimated that RR soybeans created more than $1.2 billion in economic benefits in 2001, about 4 percent of the value of the world soybean crop. Soybean consumers worldwide gained $652 million (53 percent of total benefits) as a result of lower prices. Seed firms received $421 million (34 percent) as technology revenue,1 most of which came from the United States market. Soybean producers in Argentina and the United States received benefits of more than $300 million and $145 million, respectively, whereas producers in countries where RR technology is not available faced losses of $291 million in 2001 as a result of the induced decline of about 2 percent ($4.06 per tonne) in world market prices. Farmers as a group received a net benefit of $158 million, 13 percent of total economic gains produced by the technology.

1 As in the cotton studies, gross technology revenues are used as a measure of monopoly rent. No research, marketing or administration costs are deducted. If we assume, for example, that these costs amount to 33 percent of technology fee revenues, the monopoly rent would fall to around $280 million (26 percent of total surplus).

China

More than 4 million small farmers in China are growing Bt cotton on about 30 percent of China's total cotton area. China's share of global Bt cotton area has increased dramatically since it was first commercialized in 1997 to more than 35 percent in 2001. Pray et al. (2002) surveyed cotton farmers in China over three seasons from 1999 to 2001. The surveys were conducted in the main cotton-growing provinces where both Bt and non-Bt varieties were available. The initial survey included farmers in Hebei and Shandong Provinces. Adoption has advanced rapidly in these provinces because bollworms are the major pest and severe resistance to chemical pesticides is widespread. Adoption approaches 100 percent in Hebei and exceeds 80 percent in Shandong. Henan Province was added to the survey in 2000. Bt adoption has levelled off at about 30 percent in Henan despite heavy pressure from bollworms, reportedly because farmers there do not have access to the best Bt varieties. Anhui and Jiangsu Provinces were added to the study in 2001. Adoption started later and has been slower in these provinces partly because red spider mites (which are not susceptible to Bt) are a more serious problem there.

For China, the yield advantage for Bt cotton averaged 523 kg/ha or 19 percent compared with conventional varieties over the three-year period from 1999 to 2001. This translated into an average revenue gain of 23 percent. Seed costs for the Bt varieties were almost double those for conventional varieties. Compared with the Argentine case, however, this price premium is quite low. Pray et al. (2002) attribute the relatively low price premium for Bt seed to the presence of strong competition in the market between the CAAS varieties developed by the public sector and those available from Monsanto. Offsetting the seed price premium, pesticide costs were 67 percent lower, and total costs were 16 percent lower than for conventional cotton. Total profits averaged $470 more per hectare for the Bt producers than for the non-Bt producers, who in fact lost money in each of the three years.

Pray et al. (2002) estimate that Bt cotton farmers in China reduced their use of chemical pesticides by an average of 43.8kg/ha compared with conventional cotton farmers. The largest reductions were in Hebei and Shandong Provinces, where bollworms are the major pest. Lower pesticide use translated into lower costs for chemicals and labour for spraying, but additional environmental and health benefits were also found. As a result of Bt cotton, pesticide use in China was reduced by an estimated 78 000 tonnes in 2001, an amount equal to about one-quarter of the total quantity of chemical pesticides used in China in a typical year. Because chemicals are typically applied with backpack sprayers in China and farmers rarely use protective clothing, they are often exposed to dangerous levels of pesticide. Bt cotton farmers experienced a much lower incidence of pesticide poisonings than those growing conventional varieties (5-8 percent vs 12-29 percent).

Pray and Huang (2003) looked at the distribution of economic benefits in China by farm size and income class. They found that farms of less than 1 ha had more than double the net increase in per hectare income of those larger than 1 ha (Table 8). Poorer households and individuals also received a much larger per hectare increase in net incomes than richer ones. These results suggest that Bt cotton is generating large pro-poor gains in net income in China.

TABLE 8 Distribution of benefits of Bt cotton adoption by size of farm or income class in China, 1999

(kg/ha)

($/ha)

($/ha)

Bt as percentage of observations

Yield increase

Change in total cost

Change in net income

FARM SIZE

0.0-0.47 ha

86

410

-162

401

0.47-1 ha

85

-134

-534

466

1+ ha

87

-124

-182

185

HOUSEHOLD INCOME ($)

1-1 200

85

170

-302

380

1 200+

91

65

-54

157

PER CAPITA INCOME ($)

1-180

85

456

-215

446

180-360

83

8

-284

303

360+

97

-60

1

-15

Note: all monetary figures are converted from yuan renminbi to United States dollars at the official exchange rate: $1.00 = RMB¥ 8.3.Source: Pray and Huang, 2003.

India

Bt cotton was only approved for commercialization in India in 2003 and therefore market-based studies are not yet available. Qaim and Zilberman (2003) analysed Indian field trial data from 2001 and reported changes in crop yields and pesticide use between conventional and Bt cotton. The trials were initiated by the Indian company Maharashtra Hybrid Seed Company (Mahyco) on 395 farms in seven Indian states. The trials were supervised by regulatory authorities and managed by farmers using customary practices. The study compared yield performance and chemical use for a Bt hybrid, the same hybrid without the Bt gene, and a popular non-Bt variety grown on adjacent 646 m2 plots. The analysis was based on results from 157 representative farms for which comprehensive records were kept. Table 7 on page 48 reports the comparison between the Bt hybrid and the same hybrid without the Bt gene.

Average effective yields for the Bt hybrid exceeded those for the non-Bt hybrid by 80 percent, reflecting high levels of pest pressure during the growing season and a lack of alternative pest control options. This yield differential is much higher than that found in China, Mexico and the United States. Qaim and Zilberman (2003) argue that the performance differential for Bt cotton is higher in India than elsewhere because pest pressure is high and farmers do not have access to affordable and effective pesticides. They argue further that the non-Bt hybrid and popular varieties had similarly poor performance, suggesting that yield potential was not a factor in the performance differential between the Bt and non-Bt hybrids. The authors acknowledge that the results for a single year may not be representative and cite data from smaller field trials conducted by Mahyco, which showed an average yield advantage of 60 percent over the four-year period 1998-2001. Other field trial studies in India have found yield advantages for Bt cotton ranging from 24 percent to 56 percent (average 39 percent) for the years 1998/99 and 2000/01 (James, 1999; Naik, 2001).

Qaim and Zilberman (2003) report that insecticide resistance is widespread in India, so that ever-increasing amounts of pesticide have to be sprayed each year. Their survey results for 2001 showed the number of chemical sprays against bollworms was reduced from an average of 3.68 to 0.62 per season, although the number of sprays against other insects was not significantly different. The overall amount of insecticide use was reduced by 69 percent, with almost all the reduction occurring in highly hazardous organophosphates, carbamates and pyrethroids belonging to international toxicity classes I and II.

Mexico

The amount of cotton planted in Mexico varies widely from year to year depending on government policies, exchange rates, world prices and - critically - the availability of water for irrigation. Cotton area declined from about 250 000 ha in the mid-1990s to about 80 000 ha in 2000, whereas the share planted to Bt varieties grew from about 5 percent to 33 percent.

Bt adoption patterns in Mexico reflect regional patterns of pest infestation and economic losses resulting from pest damage (Table 9). Adoption has been most rapid in Comarca Lagunera, a region that comprises parts of the states of Coahuila and Durango, and the region most critically affected by bollworms. The other cotton-growing regions of Mexico are afflicted with boll weevil and other pests that are not susceptible to Bt and thus require the use of chemical controls. Bt adoption is correspondingly low in these regions. Bt cotton is barred from the southern states of Chiapas and Yucatan where wild species of Gossypium hirsutum, a native relative of cotton, exist (Traxler et al., 2003).

The Bt cotton varieties grown in Mexico were developed originally for the United States market by D&PL in cooperation with Monsanto. Monsanto requires farmers in Mexico to sign a seed contract that forbids them from saving seed and requires them to have their cotton ginned only at Monsanto-authorized mills. The contract also requires farmers to follow a specified resistance management strategy and to permit Monsanto agents to inspect their fields for compliance with refugia and seed-saving restrictions (Traxler et al., 2003).

Cotton producers in Comarca Lagunera are generally classified as falling into one of three groups: ejidos, small landholders and independent producers. Ejidos have landholdings of 2-10 ha, small producers 30-40 ha and independent producers somewhat more but typically less than 100 ha. Ejidos and small landholders are organized into farmer associations for the purposes of obtaining credit and technical assistance. Each farmer group has a technical consultant who works for the association. Traxler et al. (2003) surveyed cotton farmers in Comarca Lagunera for the 1997 and 1998 growing seasons through the technical consultants working for the association SEREASA. The association is one of the largest in Comarca Lagunera, and had 638 farmers owning almost 5 000 ha of land during the study period. Of this total area, between 2 000 and 2 500 ha were planted to cotton, about 12 percent of the cotton area in Comarca Lagunera. Bt varieties were planted on 52 percent of the cotton area in Comarca Lagunera in 1997, increasing to 72 percent in 1998. According to the authors, the sample group was fairly representative of small-to-medium landholders but probably underrepresented large producers.

The average effective yield differential between Bt and conventional cotton was 165 kg/ha or about 11 percent, considerably lower than for the other countries shown in Table 7. The yield differential varied sharply over the two growing seasons covered by the survey, from almost nil in 1997 to 20 percent in 1998. The authors noted that 1997 was a year of very low pest pressure in Comarca Lagunera. Pesticide costs were about 77 percent lower for Bt than for conventional cotton, and the number of chemical sprays was lower. Seed costs were almost three times higher for Bt cotton, reflecting a fairly high technology premium. As a result, the average profit differential for the two years was $295/ha. This varied from less than $8 in 1997 to $582 in 1998.

Traxler et al. (2003) calculated the distribution of the economic benefits from Bt cotton in Comarca Lagunera between the farmers in the region and the companies supplying the Bt varieties, Monsanto and D&PL. For the two years of the study, farmers captured an average of 86 percent of the total benefits, compared with 14 percent for the germplasm suppliers (Table 10). The per hectare change in profit accruing to farmers varied widely between the two years, as noted above. As a result, the total producer surplus ranged from less than $35 000 to almost $5 million. For the two years, an estimated total of almost $5.5 million in benefits was produced, most of it in the second year and most of it captured by farmers. In this calculation the entire amount attributed to Monsanto and D&PL cannot be considered truly a net benefit to the companies, because costs such as seed distribution, administration and marketing costs were not accounted for. A revenue of $1.5 million from seed sales is not a large sum for a company like Monsanto, which has $5.49 billion in annual revenue. The large annual fluctuations are largely caused by variability in pest infestation levels; in years of heavy pest pressure, Bt cotton produces a large advantage over conventional cotton varieties. Because Mexico grows a small share of the world's cotton, there are no economy-wide effects on prices or consumer welfare.

South Africa

Bt cotton was the first transgenic crop to be commercially released in sub-Saharan Africa following the implementation in 1999 of the Genetically Modified Organisms Act, 1997. By 2002 some 30 000 ha of Bt cotton were planted in South Africa, of which about 5 700 ha were in the Makhathini Flats area of KwaZulu-Natal Province. Bennett, Morse and Ismael (2003) examined the experience of resource-poor smallholder cotton farmers in the Makhathini Flats.

Vunisa Cotton is a private commercial company in the Makhathini Flats that supplies farmers with cotton inputs (seed, pesticide and credit) and buys their output. Bennett, Morse and Ismael (2003) used individual farmer records held by Vunisa Cotton to collect information on input use, yields, farm characteristics and other information for the three growing seasons beginning in 1998/99. In addition, personal interviews were undertaken with a random sample of smallholder farmers in 1998/99 and 1999/2000, and 32 in-depth case study interviews were conducted in 2000/01.

The authors report that adopters of Bt cotton benefited from higher yields (as a result of less pest damage), lower pesticide use and less labour for pesticide applications. Yields were an average 264 kg/ha (65 percent) higher for the adopters. The yield differential was particularly large in the poor, wet growing season of 1999/2000, reaching 85 percent. Adopters used less seed per hectare than non-adopters, but higher prices for Bt seed meant that total seed costs were 89 percent higher. This was offset by lower pesticide and labour costs, so total costs were only 3 percent higher for Bt cotton on average. Higher yields and nearly equal costs meant that Bt adopters achieved net profits 3-4 times higher than those of conventional producers in all growing seasons, with the differential being especially large in 1999/2000, when conventional growers lost money.

The authors examined the dynamics of Bt adoption and the distribution of benefits across farm size. In 1997/98, Vunisa Cotton purposely targeted the release of Bt cotton to a few, relatively large, farmers. By 1998/99, the first growing season of this study, approximately 10 percent of smallholders in Makhathini had adopted Bt cotton, followed by 25 percent the second year and 50 percent the third year. By the fourth season, 2001/02, which was not covered in the analysis because of data limitations, an estimated 92 percent of smallholder cotton farmers in the region had adopted the Bt variety. The authors report that larger, older, male and wealthier farmers were more likely to adopt in the first season, but by the second and third seasons, smaller farmers of various ages and both genders were also growing Bt cotton. Their analysis showed that smaller farmers growing Bt cotton actually earned higher per hectare gross margins than did larger Bt cotton growers.

BOX 16 Costs of not adopting Bt cotton in West Africa

In a study of five West African cotton-producing countries, Cabanilla, Abdoulaye and Sanders (2003) examined the economic benefits that could accrue to cotton farmers if Bt cotton were introduced to the region. Cotton is a major source of export revenue in these countries - Benin, Burkina Faso, Côte d'Ivoire, Mali and Senegal - and a source of cash income for millions of resource-poor farmers. Depending on the rate of adoption and the actual yield advantage, the potential benefits for these countries as a group could range from $21 million to $205 million.

Cabanilla, Abdoulaye and Sanders (2003) based their analysis on the similarities between pest populations and chemical use in these countries with those found in other developing countries where Bt cotton has been introduced. The major insect pests in West Africa are bollworms, which are currently controlled by spraying up to seven times per season with broad-spectrum insecticides, usually a combination of organophosphates and pyrethroids. As in other regions where these insecticides are used, pest resistance has been reported. Given current conditions, the authors conclude that Bt cotton would probably be highly effective in controlling the pests found in the region.

The authors used the experiences of other developing countries to posit a range of yield increases and cost reductions that could accompany the adoption of Bt cotton. These assumptions were then used to calculate a range of potential economic impacts for the five countries under alternative adoption scenarios. Under their most optimistic scenario (45 percent yield advantage and 100 percent adoption) farmers in the five countries would earn an additional $205 million in net revenues: Mali $67 million, Burkina Faso $41 million, Benin $52 million, Côte d'Ivoire $38 million and Senegal $7 million. Under the most pessimistic scenario (10 percent yield advantage and 30 percent adoption) total benefits are reduced to $21 million, allocated proportionately among the five countries as in the first scenario. These results translate into farm-level income gains per hectare of 50-200 percent.

In 2003, the Government of Burkina Faso embarked on the evaluation of Bt cotton in cooperation with Monsanto.

Conclusions

This chapter has reviewed the experience to date with the use of transgenic crop varieties, especially Bt cotton, in developing countries. The evidence has been collected from impact studies of the diffusion of Bt cotton in Argentina, China, India, Mexico and South Africa, as well as in the United States. Additional evidence on the impact of HT soybeans in Argentina and the United States was also discussed. Some general conclusions emerge from the review of these crops, although caution is necessary in extrapolating from one crop or country to another, from the short term to the long term and from a small sample of farmers to an entire sector.

First, transgenic crops have delivered large economic benefits to farmers in some areas of the world over the past seven years. In several cases the per hectare savings, particularly from Bt cotton, have been large when compared with almost any other technological innovation introduced over the past few decades. However, even within those countries where transgenic products have been available, adoption rates have varied greatly across production environments depending on the specific production challenges present in the area and the availability of suitable cultivars. Transgenic crops can be useful in certain circumstances, but they are not the solution to all problems.

Second, the availability of suitable transgenic cultivars often depends on national research capacities, and their accessibility by small farmers always depends on the existence of an effective input delivery system. Farmers in some countries have been able to take advantage of innovations and crop varieties developed for the North American market, but for most parts of the world the development of locally adapted ecology-specific cultivars will be essential. In all countries where transgenic cotton has been adopted by small farmers, a seed delivery mechanism has been in place and in some cases small farmers have been specifically targeted. In most countries, national seed companies have served this function in cooperation with a transnational firm and, often, with the support of the national government and farmers' organizations.

Third, the economic impacts of Bt cotton depend on the regulatory setting in which it is introduced. In all the cases studied, the countries have a biosafety process in place that has approved the commercial planting of Bt cotton. Countries that lack biosafety protocols or the capacity to implement them in a transparent, predictable and trusted way may not have access to the new technologies. A related concern is that farmers in some countries may be planting transgenic crops that have not been evaluated and approved through proper national biosafety procedures. These crops may have been approved in a neighbouring country or they may be unauthorized varieties of an approved crop. Where the crop has not been cleared through a biosafety risk assessment that takes into consideration local agro-ecological conditions, there may be a greater risk of harmful environmental consequences (see Chapter 5). Furthermore, unauthorized varieties may not provide farmers with the expected level of pest control, leading to continued need for chemical pesticides and a greater risk of the development of pest resistance (Pemsl, Waibel and Gutierrez, 2003).

Fourth, although the transgenic crops have been delivered through the private sector in most cases, the benefits have been widely distributed among industry, farmers and final consumers. This suggests that the monopoly position engendered by intellectual property protection does not automatically lead to excessive industry profits. It is apparent from the Bt cotton results for Argentina, however, that the balance between the intellectual property rights of technology suppliers and the financial means of farmers has a crucial impact on adoption of the products and hence on the level and distribution of benefits. The case of China clearly illustrates that public-sector involvement in research and development and in the delivery of transgenic cotton can help ensure that poor farmers have access to the new technologies and that their share of the economic benefits is adequate.

Fifth, the environmental effects of Bt cotton have been strongly positive. In virtually all instances insecticide use on Bt cotton is significantly lower than on conventional varieties. Furthermore, for HT soybeans, glyphosate has been substituted for more toxic and persistent herbicides, and reduced tillage has accompanied HT soybeans and cotton in many cases. Negative environmental consequences, although meriting continued monitoring, have not been documented in any setting where transgenic crops have been deployed to date.

Finally, evidence from China (Pray and Huang, 2003), Argentina (Qaim and de Janvry, 2003), Mexico (Traxler et al., 2003) and South Africa (Bennett, Morse and Ismael, 2003) suggests that small farmers have had no more difficulty than larger farmers in adopting the new technologies. In some cases, transgenic crops seem to simplify the management process in ways that favour smaller farmers.

The question therefore is not whether biotechnology is capable of benefiting small resource-poor farmers, but rather how this scientific potential can be brought to bear on the agricultural problems of developing country farmers. Biotechnology holds great promise as a new tool in the scientific toolkit for generating applied agricultural technologies. The challenge at present is to design an innovation system that focuses this potential on the problems of developing countries.

3 All references to yield in this chapter refer to actual or effective yield as opposed to potential agronomic yield. Actual or effective yield accounts for losses resulting from pest damage.